{"id":235711,"date":"2018-03-23T05:00:44","date_gmt":"2018-03-23T12:00:44","guid":{"rendered":"http:\/\/getrichslowly.org\/?p=235711"},"modified":"2024-04-29T10:26:43","modified_gmt":"2024-04-29T16:26:43","slug":"advice-for-a-young-adult","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/advice-for-a-young-adult\/","title":{"rendered":"Advice for a young adult learning to manage money"},"content":{"rendered":"

Note:<\/strong><\/em> Today’s post is a little different. It’s a letter to a young friend, who asked to remain anonymous. She’s 21 and just landed her first job. Now that she’s bringing home a regular income, she wanted advice on what to do with her money. Here’s my response.<\/p><\/blockquote>\n

First up, I think it’s awesome that you asked me for advice. That took guts! Plus, it’s a sign that you’re already making good decisions. You’re being proactive<\/a>, taking charge of your own life. I like that.<\/p>\n

Like you, my parents didn’t teach me how to handle money very well. They did their best, but it’s tough to teach what you don’t know. I’ve had to figure a lot of this stuff out on my own, and I’ve made a lot of mistakes along the way.<\/p>\n

You’ll make mistakes with money too, I’m sure. They key is to not let these mistakes compound. Don’t let one mistake lead to another mistake. When something goes wrong, pause. Take a deep breath. Don’t panic. Call me for advice, or ask somebody else who seems to have things figured out. Okay?<\/p>\n

I have so much<\/em> I want to share with you, but I’m going to hold back. I don’t want to overwhelm you with stuff that you don’t need to know right now. Do me a favor, though, and read that book I mailed you: I Will Teach You to Be Rich<\/em><\/a>. There’s a lot of good info in there. Some of it won’t apply to you yet, but it doesn’t hurt to read the whole thing so that you can know what’s coming in the future.<\/p>\n

For now, let’s focus on the fundamentals.<\/p>\n

<\/span>First Things First<\/span><\/h2>\n

After thinking about this for nearly a week, I think that your focus should be setting up what I call your basic “financial infrastructure”, then creating three buckets for your money.<\/p>\n

To start, you need two bank accounts: a checking account and a savings account.<\/p>\n

You told me that you already have a Capital One 360 checking account<\/a>, which is awesome. That account has no fees. (Some banks, like Wells Fargo, charge an outrageous $10\/month fee for checking. This is insane<\/em>. There’s never a good reason to pay a bank for the privilege of having an account with them.)<\/p>\n

It’s also awesome that you’re having your weekly paycheck automatically deposited to your checking account. Super smart.<\/p>\n

The next step is to open a savings account. I know that you’d like to save for some future goals, such as possibly purchasing a house. To do that, it’s best to separate your savings from the pool of money in your checking account.<\/p>\n

Since you already have a Capital One 360 checking account, you should open a savings account with them too. Kim and I have some joint Capital One 360 savings accounts<\/a>. We like it because we’re able to have different accounts for different purposes, and we can name each one. (When we were saving for the RV, for instance, we had a specific account just for the RV.)<\/p>\n

What about credit cards? Don’t worry about them yet. As you said, you want to establish good money habits. Once you’ve learned how to save and spend without getting into trouble, then you might consider a credit card. But that’s a talk for sometime in the future.<\/p><\/blockquote>\n

<\/span>Make a Plan<\/span><\/h2>\n

Now that you have your basic financial infrastructure in place, it’s time to make a plan for where your money will go each month. You don’t need a detailed budget. If you want one, fine, but there’s no real need.<\/p>\n

You’re bringing home about $200 per week, which is roughly $800 per month. Make sure you know how much is being taken out of your paycheck for taxes. If you don’t have enough withheld, you’ll owe money next April. Odds are, however, that everything is fine.<\/p>\n

From your $800 monthly income, I recommend you route your money into three “buckets”: fixed expenses (or “needs”), discretionary spending (or “wants”), and savings.<\/p>\n

Let’s look at fixed expenses first.<\/p>\n

I’m under the impression that you have $350 of fixed expenses right now: the money that you pay your mother for phone and housing. One popular rule of thumb is that you should spend less than 50% of your income on fixed expenses — and less is better. You’re at about 44%, so you’re in good shape. Nice work!<\/p>\n

Now, here’s something important.<\/p>\n

You’re 21 now, and you’ll probably want to move out on your own in a year or two, maybe with a friend. That’s great! When you do look for your own place, though, keep your housing cost as low as possible. Seriously, I cannot stress this enough. The number one way to screw yourself over is to pay too much in housing!<\/strong> So many people do this every day, and it’s tough to recover from. Always always always do what you can to keep your housing costs low.<\/p>\n

Remember this rule of thumb: Your spending on needs should be less than half your paycheck.<\/strong> Following that one rule alone will put you far ahead of your peers.<\/p>\n

Now let’s look at the other two “money buckets”: discretionary spending and saving.<\/p>\n

<\/span>Spending and Saving<\/span><\/h2>\n

After you’ve met your monthly obligations, any money you have left over is yours to do with as you please. You have two basic options here.<\/p>\n